C Citigroup Inc

By Christina Rexrode 

Citigroup Inc. got a green light on the Federal Reserve's stress test for the second year in a row, and the bank announced it would triple its shareholder dividend.

The Fed on Wednesday approved the New York bank's capital plan after determining that Citigroup could keep lending in a severe economic downturn. The bank said it would increase its quarterly dividend to 16 cents, from 5 cents. It also received permission to buy back up to $8.6 billion of its own shares in the coming year, up from last year.

The Fed's approval gives breathing room to Citigroup CEO Michael Corbat. The bank had failed the test twice, including one time during his tenure as chief executive. One of Mr. Corbat's mandates when he was installed in the job was to improve the bank's relationship with regulators.

The Fed's approval is also particularly important to the bank because many investors have been disappointed by its relatively low dividends and share price. This marks just the second time since the financial crisis that the bank has increased its dividend.

Citigroup shares rose 2.6% after-hours, the sharpest move of the big six U.S. banks reviewed by the Fed.

Analysts had predicted that the bank would increase its dividend to somewhere between 10 cents and 20 cents. Mr. Corbat said in a statement that the bank remained "intently focused on strengthening and improving Citi's capital planning process while delivering the returns that our shareholders expect and deserve."

The bank might have also been helped because it took a more conservative tack on its submission. Generally, the banks are more optimistic than the Fed is about how they would fare in a severe recession. But last week, on the first round of stress-test results, Citigroup estimated that a key capital ratio would fall lower than the Fed did.

Citigroup had another regulatory victory in April, when it was the only bank to get approval for its "living will," which details how it would navigate a potential bankruptcy, from both the Fed and the Federal Deposit Insurance Corp.

The latest stress-test result assesses how the banks would fare in a severe recession that included a 10% U.S. unemployment rate, significant losses in corporate and commercial real estate lending portfolios, and negative rates on short-term U.S. Treasury securities.

The Fed calculated that at the low point of a hypothetical recession, Citigroup's common equity Tier 1 ratio -- which measures high-quality capital as a share of risk-weighted assets -- would be 7.7%, above the 4.5% level the Fed views as a minimum. The new ratio, unlike the one reported last week by the Fed in the first round of the test, takes into account the bank's proposed capital plan.

The bank's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, would be 6.1% in a hypothetical recession under the Fed's estimates, above the 4% minimum.

Write to Christina Rexrode at christina.rexrode@wsj.com

(END) Dow Jones Newswires

June 29, 2016 17:58 ET (21:58 GMT)

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